P.S.DATTA, J. - (1.) BRIHANMUMBAI Electric Supply and Transport Undertaking (of Brihanmumbai Municipal Corporation),hereinafter to be called BEST who is the appellant herein filed a petition, being no.95 of 2009 ,before the Maharashtra State Electricity Regulatory Commission(for short, the State Commission) in respect of True Up of its ARR for the FY2008 -09, Annual Performance Review(APR) for the FY 2009 -10 and a Tariff Application for the FY 2010 -11 on 31.12.2009 upon which the State Commission passed an order on 12.9.2010 against which this appeal has been preferred on series of grounds which will be noticed as we will proceed with the appeal. The True up petition was filed on the basis of audited statement of accounts for the FY 2008 -09, the APR is said to had been preferred on the basis of actuals from April to September and a revised statement from October to March for the FY 2009 -10, and projections for determination of tariff for the FY 2010 -11. Be it noted that the appeal is not directed against the order in its entirety but in respect of some grounds which are, of course, voluminous.
(2.) THE following are the grounds: - A. According to the appellant, in case no.118 of 2008 relating to the True Up for 2007 -08,, APR for the FY 2008 -09, and Tariff for the FY2009 -10 the Commission by the order approved on account of employee expenses a sum of Rs142.94crore although the appellant claimed Rs.150.35, while in the impugned order the Commission against the appellant's claim of Rs.158.65crore allowed a sum of Rs.143.34 only thus denying the claim of Rs.15.31crore on the unsustainable ground that the expenses were controllable but the hard reality was that while comparing with the employees expenses with some other entities it was necessary to consider the Reliability Index, Standard of Performance, Number of Consumers, the geographical area, consumer mix, Distribution System etc. Moreover, the Dearness Allowance payable to the employees is actually an uncontrollable factor and which varies as per the Consumer Price Index The consumer index which in the FY 2007 -08 was 6.22% rose to 9.08% in 2008 -09.The State Commission erred in failing to appreciate the import of the regulation 17.6.2 of the MERC (Terms and Conditions for Determination of Tariff) Regulations, 2005. B. The second ground is in respect of A and G Expenses which was claimed at Rs.74.80crore for the FY 2008 -09 but was allowed at Rs.72.51crore and this was exactly the same as was approved in no 118 of 2008 on the ground that it was a controllable parameter. The appellant listed 15 items out of which the expenditure increased in 7 items, while the expenditure was reduced in respect of 8 items. The Commission did not assign any reason for refusal of the total claim of the appellant. C. With respect to capitalisation the claim of the appellant was for Rs.133.99crore for the FY 2008 -09 against which the Commission approved only a sum of Rs.122.20, as compared to Rs.69.00crore in case no.118 of 2008 decided on 15.6.2009. According to the appellant, the Commission failed to consider that after excluding the double impact of IDC of Rs1.55crores for the FY 2008 -09, the actual capitalisation for FY 2008 -09 is composed of works capitalized amounting to Rs.121.00crore, IDC of Rs.9.44crore which totals to Rs.130.44crore. D. As a corollary to the reduction of the amount of capitalisation for the FY 2008 -09, the State Commission reduced the interest expenses from the claimed amount of Rs.32.44crore to Rs.22.76crore as compared to Rs.9.31crore in case no 118 of 2008 without considering that the appellant submitted that out of the capital expenditure of Rs.131.43crore a sum of Rs.122.56crore had been capitalized and the balance of Rs.8.87crore was the capital works in progress, that during H1 of FY 2008 -09 the Appellant took loan of Rs.25crore from Vijaya Bank @10% interest per annum in addition to the opening balance of short -term finance of Rs.100crore from Canara Bank @11.50%interest and Rs.50crore from Vijaya Bank @10% interest per annum, that for H2 of FY 2008 -09 the appellant raised an additional loan of Rs85crore from Vijaya Bank @10.5% interest per annum to service and pay the interest and principal amount of earlier loan of Rs50crore obtained in FY 2007 - 08 from Vijaya Bank @10% interest per annum, that capitalisation of Rs.131.99crore was funded by consumer contribution (Rs.9.72crore), Government grant (Rs.4.78crore) and debt (Rs.85.07crore) but the Commission erred in increasing the loan amount at Rs107.70crore and it failed to consider the applicability of debt: equity ratio at 70:30 under regulation 73.1 of the Tariff Regulations,2005. E. With regard to Return on Equity the appellant contends that the Commission should have allowed Rs108.83while truing up for the FY 2008 -09 as against Rs91.43crore allowed by the State Commission in its order dated15.6.2009 in case no 118 0f 2006 and the commission erred in reducing ROE to Rs100.5crore by not considering the normative equity (30%)of Rs.46.85crore and /or Rs.32.42crore for the FY 2007 -08 and FY 2008 -09 respectively on net amount of capitalisation. F. On interest on working capital the appellant claimed an amount of Rs.23.23crore but the Commission approved a sum of Rs.10.89crore as against Rs.3.94crore in case no 118 of 2008.The appellant had to incur additional expenditure towards external power purchase The appellant had to pay Rs.9.39 per unit as against the MERC approved rate of Rs. 5.50 per unit towards external power purchase and it had to face cash crunch of Rs.406.10crore. G. On account of contribution to contingency reserve the Commission illegally reduced a sum of Rs.3.18crore for FY 2008 -09.The Commission should have allowed the CCR of Rs.6.45crore while truing up for FY 2008 -09.The Commission considered CCR to the extent of 0.25% of opening GFA for FY 2008 -09 but the appellant contributed to the contingency reserve which is 0.5% of opening GFA for FY 2008 -09. H. The appellant claimed non -tariff income at Rs.70.83crore but the Commission fixed it at Rs.74.78crore as compared to Rs.55.53crore approved in the case no 118 of 2008.The Commission erred in inflating the non -tariff income for FY 2008 -09 by considering the interest on contingency reserve investments @7%on the average balance of contingency reserves during the year and including the same under non - tariff income. According to the appellant, it does not have equity in the traditional sense and the funding of capitalisation is mainly done through internal resources with the approval of the BEST Committee and the Municipal Corporation. The contingency reserve is one of the internal sources used for funding the capital expenditure and interest on the contingency reserve should not be considered as non -tariff income. The balance contingency reserve of Rs.58.70crore as on 31.3. 2008 had already been utilised for acquiring assets and has not been invested as a contingency reserve. Only the balance under the contingency reserve amounting to Rs.6.45crore as on 31.3.2009 should have been considered by the Commission. I. On computation of sharing of Gains and Loses for FY 2008 -09 the Commission failed to consider that out of the total efficiency gain for R and M expenses amounting to Rs.1.96crore, one -third was required to be retained by the appellant in a special reserve in addition to one -third being available for use at its discretion under regulation 19 of the Tariff Regulations, 2005. The Commission committed error in considering that out of the efficiency gain due to reduction of distribution losses amounting to Rs.37.91crore, one -third was required to be retained by the appellant in a special reserve in addition to one -third being available for use at its discretion and in consequence, the balance sum of Rs.25.28crore should have been considered in determination of ARR and tariff for FY2010 -11. J. On computation of Aggregate Revenue Requirement and Revenue Gap for FY 2008 -09 the Commission is alleged to have erred in holding that for FY 2008 -09 the net ARR is Rs.3175.97crore as against Rs.3235.87crore claimed by the appellant, revenue from existing tariff at Rs.2852.31crore as against Rs.2832.28crore claimed by the appellant and net revenue gap at Rs323.66crore as against Rs403.59crore claimed by the appellant. The Commission also erred in holding that for FY 2008 -09 the additional recovery of Rs20.03crore made by the appellant through its vigilance drives should be considered as revenue in the year in which recovery is made, and consequently added the same to the revenue from sale of electricity. The Commission too erred in failing to consider that the additional recovery of Rs20.03crore made by the appellant through its vigilance drives is effected generally under section 126 and /or 135 of the Act, 2003. K. It is contended that the Commission erred in reducing the discount given by the TPC -G in the matter of power purchase cost amounting to Rs22.26crore because the discount given by the TPC -G pertains to the prompt payment made by the appellant to the TPC -G as per PPA, and that the appellant has already considered the said prompt payment discount amount as a non -tariff income in the petition no 95 of 2009. L. The next item is concerned with disallowance of employee expenses for FY 2009 -10 and FY 2010 -11. It is contended that the Commission erred in holding that the employee expenses for FY 2009 -10 and FY 2010 -11 was only Rs152.44crore and Rs68.38crore respectively as against Rs170.45crore and Rs182.84crore respectively estimated by the appellant and as compared to Rs153.39crore approved by the Commission in case no 118 of 2008, that the Commission reduced the allowable employee expense for FY 2009 -10 considering an increase of around 6.35% per annum on account of CPI over the revised level of employee expenses for FY 2008 -09 approved by the Commission but the revised estimate of employee expense for FY 2009 -10 is escalated at the rate of 7.31% as per the order in case no 118 of 2996. that the actual expenses was allowed by the Commission for FY 2004 -05, FY 2005 -06 and FY 2006 -07 as per the appellant's submission, that the Commission therefore erred in reducing the employee expenses by changing the inflation factor from 7.31% to 6.35% per annum over the revised level of employee expenses approved for the FY 2008 -09, that the Commission already considered the increase on account of inflation rate of around 8.49% by considering the point to point inflation over the CPI for a period of 5 years to smoothen the inflation curve for the FY 2010 -11, and that inflation curve was required to be curved from FY 2007 -08 to FY 2009 -10,and that the average increment of these 3 years works out to 9.20% as against 8.49% increase in inflation considered by the Commission . M. The Commission erred in holding that the A and G Expenses for FY 2009 -10 and FY 2010 -11 was only Rs76.48crore and Rs81.85crore respectively as against Rs79.39crore and Rs84.15crore respectively as estimated by the appellant and as compared to Rs76.89crore approved in Case no 118 of 2008 overlooking the fact the rate of escalation was 6.04% as per the Commission's own order in case no 118 of2006, that the Commission already allowed the actual for three successive years from FY 2004 -05, 2005 -06, 2006 -07 and as such the inflation curve is also required to be considered for FY 2007 -08,2008 -09, and 2009 -10. N. With respect to disallowance of R and M Expenses for FY 2009 -10 and FY 2010 -11 it is contended that the said expenses for FY 2009 -10 and FY 2010 -11 was Rs.29.52crore and Rs34.12crore respectively as against Commission's allowance of Rs26.56crore and Rs.28.17crore and as compared to Rs.28.69crore approved by the Commission in case no. 118 of 2008, that the Commission without any reason reduced the allowable R and M expenses for FY 2009 -10 considering increase of around 4.91% per annum on account of WPI over the revised level of R&M expenses for FY 2008 -09 after truing up, that when the Commission allowed the actual expenses for FY 2004 -05 to 2006 -07 the same was required to be considered for the next three financial years, the Commission was not correct by reducing the inflation factor from 5.19 % decided in case in. 118 of 2008 to 4.91 %, that similarly for the FY 2010 -11 Commission did not allow what was claimed by the appellant. O. As regards reduction in interest expenses for FY 2009 -10 and FY 2010 -11 the Commission did not give any reason although, the appellant claimed Rs.19.17crore and Rs.30.12crore as against Rs.14.68crore and Rs.16.71crore allowed by the Commission and as compared to Rs. 19.42crore in case no. 118 of 2008, that the Commission was not justified in such reduction, that the appellant claimed that it incurred capital expenditure of Rs.181.87crore for FY 2009 -10 to be funded by consumer contribution of Rs.10crore with no government grant and it accordingly proposed to raise Rs.120crore as short term finance from the bank and balance normative equity of 30 % (Rs.51.87crore) through internal sources and for FY 2010 -11 it proposed to raised Rs.145.64cror and short term finance and balance normative equity of 30 % (Rs.58.07crore) through internal sources, that the Commission considered no equity fund for FY2009 -10 and FY 2010 -11 and considered 100 % loan of Rs.123.54crore for FY 2009 -10 and Rs.140crore for FY2010 -11 with consumer contribution of Rs.10crore in each of the two years and with the government grants of Rs.1.46crore for FY 2009 -10, and the Commission failed to consider that the loan capital would have to be provided corresponding to assets put to use and not only capital expenditure . P. With respect to reduction of return of equity for FY 2009 -10 and FY 2010 -11 Commission reduced the figure without any reason although it allowed Rs.103.41crore in case no. 118 of 2008. The appellant claimed Rs.114.66crore and Rs.121.50crore for FY 2009 -10 and 2010 - 11 respectively but the Commission reduced it to Rs.99.16crore in each of the two years and did not consider the normative equity of 30 % in each of the two years on the net capitalisation amount. Q. On contribution to contingency reserve for FY 2009 -10 and FY 2010 -11 the Commission reduced the amount to Rs.3.55crore and Rs 3.88crore respectively as against the claimed amount of Rs.7.18crore and 7.87crore on the alleged ground that the Regulation provided for CCR of a sum not less than 0.25% and not more than 0.50% of original cost of fixed assets but the appellant according to Regulation estimated the CCR at 0.5% of the opening GFA for FY 2009 -10 and FY 2010 -11 . R. It is alleged that the Commission did not allow the non tariff income for FY 2009 -10 and FY 2010 -11 at Rs.71.15crore and Rs.71.49crore respectively as was claimed by the appellant and inflated the figures to Rs.82.26crore and Rs.90.49crore by merely considering year - wise increase of 10% in the non tariff income. S. With regard to Distribution Loss and Energy Input Requirement for FY 2010 -11 the Commission considered 9.50 % and 5098 MU as against 10% and 5046 MU claimed by the appellant and the Commission did not consider that it was practically not possible to annually reduce the distribution loss in a linear trajectory of 0.5% after the distribution losses have levelled out at low level of around 10%. The Commission was not correct in allowing target distribution loss for FY 2010 -11 at 9.5 % based on further 0.5% reduction over the trajectory for FY 2009 -10. T. With regard to sale for FY2010 -11 Commission committed error in not appreciating that on considering the actual sale of 4121 MU for FY2009 -10 the five year Compounded Annual Growth Rate was 3.18 % over the period from FY 2004 -05 to FY 2009 -10 and that on projecting the sale to be 4390 MU for FY 2010 -11 the increase would be 6.57 % over the actual sales of FY2009 -10 which was clearly excessive in view of the fact that the appellant's projection of sales of 4321 MU for FY 2010 -11 had considered the 5 year CAGR of 3.77% over the period from FY 2003 -04 to FY 2008 -09 and the CAGR for 5 years considering the actual sale for FY 2009 -10 was only 3.18 %. The Commission failed to appreciate that on projecting the sales of 333 MU for LT -II A category ( more than 1000 units slab) for FY 2010 -11, the said sale would be 50.34 % more than actual sales of 221.5 MU for FY 2009 -10 in the same category . U. On consideration of energy availability and power purchase cost for FY 2010 -11 the Commission was wrong in holding that the power purchase cost for the said year was Rs.2042.37crore as against Rs.2236.94crore projected by the appellant because the Commission did not consider the net generation of unit -8 of TPC -G and arbitrarily held that 634 MU of energy was available to the appellant from TPC -G for FY 2010 -11. Further the appellant claimed Rs.2037.91crore for FY 2010 -11 as energy purchase cost for the quantum of 4716.49 MU but the Commission reduced the amount to Rs.1860.72crore in respect of purchase of 4741.30 MU without any reason. The Commission was wrong in not considering the amount of Rs6.24crore payable by appellant to TPC -G. V. The Commission made double deduction of Rs.1.34crore for impact due to truing up for FY 2007 -08 after cost benefit analysis while computing the ARR and revenue gap for FY 2010 -11 . W. The Commission was wrong in holding that for FY 2009 -10 the revenue from retail tariff after provisional true up was Rs.2911.18crore as against Rs.2896.57crore claimed by the appellant. The Commission was wrong in holding that additional recovery of Rs.14.61crore should be added to the revenue from sale of electricity.
(3.) THE only respondent in this appeal is the Commission which has filed a counter affidavit contending as follows: A .With regard to disallowance of employees expenses to the extent of 15crore for FY 2008 -09 it is contended that employee expenses are controllable expenses and the Commission has undertaken sharing of efficiency loss and one third of the difference has been added to the ARR of the appellant to be recovered. The Commission has neither allowed nor disallowed the employees' expenses on the basis of any bench marking exercise which was in process. B. The A&G expenses are also controllable expenses and the Commission has undertaken sharing of efficiency loss and one third of the difference has been added to ARR of the appellant and has been allowed to be recovered by the appellant. C. With respect to reduction of capitalisation to the extent of Rs9.79crore for 2008 -09 the Commission admits the mistake and submits that the same should have been considered for FY 2008 -09 and impact of the same would also impact the computation of subsequent years since the opening balance of the assets would change. D. With respect to reduction of interest expense to the extent of Rs9.68crore for the FY 2008 -09 it is contended that the Commission considered only the consumer contribution of Rs9.72crore, government grant of Rs4.78crore and debt based on actual loan of Rs.107crore totalling Rs122.20crore. A reduced loan component has been considered to finance the reduced capitalisation and there is corresponding reduction in the interest expenses also. The normative debt equity ratio is applied to the amount of capitalisation and not to the amount of the actual loan. E. On reduction of return on equity to the extent of Rs8.30crore for FY2008 -09 the Commission considered Rs122.20crore as the approved capitalisation and the equity component has not been considered since actual loan drawl has already been made and was sufficient to meet the reduced capitalisation. The normative debt equity ratio is applied to the amount of capitalisation and not to the amount of actual loan. The appellant was contenting that there was no need to invest any equity and part of the loan should be considered as normative equity. If that were the case, then it would be possible for any licensee to obtain a loan @ 11 -12% at treat the same as normative equity and earn ROE @ 14 - 16% which would be unjustified and illegal. F. With respect to reduction interest on working capital to extent of Rs 12.34crore it is contended that it is wrong to suggest that the entire actual working capita interest expenses have been disallowed. Since, interest in working capital is a controllable expense the Commission has undertaken sharing of the efficiency loss and one third of the difference has been added to the ARR of the appellant and has been allowed to the appellant to be recovered G. Regarding reduction of contribution to contingency reserve of Rs. 3.18crore for FY 2008 -09 it is contended that the licensee has to first make an appropriation, and the Commission then shall allow a sum not less than 0.25 % and not more that 0.5 % of the opening GFA towards such appropriation. The appellant's contention that at least 0.5 % of the opening GFA must be allowed is not correct. H. On consideration of higher non tariff income for FY 2008 -09 it is contended that the CCR has to be invested in approved security which will obviously earn interest. If the interest in CCR is not considered it would amount to injustice to the consumer. If there is no investment of the CCR in approved security then it is violation of the Regulations I. On computation of sharing of gain and losses for FY 2008 -09 Commission has verified the computation and accepts that there has been as inadvertent error. J. On computation of ARR and revenue gap for FY 2008 -09 it is contended that the amount recovered through vigilance drives is included under the non tariff income. K .On the consideration of discount given by TPC -G to the extent Rs22 .26crore it is contended that the amount has not been accounted for twice i.e. under non tariff income as well as to reduce power purchase expense. L. On disallowance of employees expenses for FY 2009 -10 and Fy 2010 -11 it is contended that the Commission considered an increase of 6.35% and 8.49% for FY 2009 -10 and 2010 -11 respectively. The trend in increase in expenses is estimated over a longer period of time and merely because the actual expenses have been allowed in previous years there is no reason for not considering the CPI for these years to establish a long term trends. M. With regard disallowance of A&G expenses for FY 2009 -10 and 2010 -11 the contention is the same as in item no. l) as above. N. Regarding disallowance of R&M expenses for FY 2009 -10 and 2010 - 11 the same contentions have been raised as in issues I) and M). O. Regarding reduction of interest expenses for FY 2009 -10 and 2010 - 11 the Commission considered Rs135crore as approved capitalisation and the reduced loan has been considered for meeting the reduced capitalisation in FY 2009 -10 and in respect of 2010 -11 the same principle was followed . P. Regarding reduction of return on equity for FY 2009 -10 and FY 2010 - 11 it is contended that the Commission considered Rs135crore for FY 2009 -10 and equity component has not been considered by the Commission since actual loan drawl has already been made and was sufficient to meet the reduced capitalisation. For FY2010 -11 the same principle has been followed. Q. Regarding reduction of contribution to contingency reserve for FY 2009 -10 and 2010 -11 it is contended that the regulations provide for range within which the Commission has to consider the CCR . The Commission considered CCR @ 0.25% of the opening of GFA in accordance with the regulations. R. Regarding higher non tariff income for FY 2009 -10 and 2010 -11 it is contended that the actual non tariff income came to Rs74.78crore in FY2008 -09 which was a jump from Rs.55.53crore in FY 2007 -08 and the increase being around 35% the Commission conservatively projected an increase of 10% for FY2008 -09 which will be trued up based on actuals. S. On consideration of distribution loss and energy input requirement for FY2010 -11 it is contended that as the target losses are even now higher than the actual losses reported by the appellant there is no merit in the contention that the Commission should have fixed a higher target loss level. Moreover, MYT orders have achieved finality and the appellant has already been allowed sharing of efficiency gains. T. On consideration of sales for FY 2010 -11 it is contended that the Commission has undertaken category wise sales projection. The growth rate projected by the appellant has been accepted. Actual category wise sales in FY2009 -10 has been considered to compute the 5year CAGR and have also been considered as the base for projections as compared to the appellant's petition in which there was projection on the then available data . U. On consideration of energy availability and power purchase cost for FY 2010 -11 the Commission considered TPC -Gs projection of generation from Unit 8 for FY 2010 -11 for licensed area i.e. around 950 MU and has considered 2/3rd of this quantum as the appellant's share of Unit 8 of TPC -G . V. On deduction of Rs.34crore due to impact of truing up for FY 2007 -08 the Commission upon verification accepts the error. W. On consideration of revenue for 2009 -10 it is contended that the amount of Rs14.61crore which was collected in FY 2009 -10 as additional recovery through vigilance drives is ordinarily included under non tariff income. The appellant filed a rejoinder to the reply of the Commission which is mostly the re -iteration of what have been contended in the memo of appeal and we will consider the contentions in the rejoinder in course of our discussion.;